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Rita Tulloch, a 57-year-old retail worker, needed to upgrade her car and get her dog some much-needed surgery. She also hoped to make some home renovations.
But her superannuation funds were limited. Tulloch raised two sons, now in their 20s, alone after her husband died in 2012, and cried with relief when the funds to do these things landed in her account recently.
Rita Tulloch got a reverse mortgage to replace her car, do some home renovations and get surgery for her dog.Credit: Justin McManus
“I was overwhelmed,” she said.
Tulloch took out a reverse mortgage for the home which she owned outright in the town of Kilmore, about 60km north of Melbourne’s CBD.
She is not alone. More Australians in mid-life and beyond are looking to tap the value of their properties to revamp their homes, cover everyday expenses, buy a new car or refinance a bank loan.
There has been an uptick in interest in loans which allow borrowers to draw on their home equity via an income stream or lump sum, experts say. This comes as people live longer and must fund their retirement for more time, with a proportion having insufficient superannuation.
“Many older Australians who own their own home are flush with equity thanks to skyrocketing property prices over the last few decades. A reverse mortgage helps them unlock some of this wealth without having to sell up and move,” said Canstar data insights director Sally Tindall.
Deloitte Actuaries analysis from this year estimates that $1.5 trillion of available equity is held by retirees in housing, with $375 billion the potential addressable market for reverse mortgages, adjusted for average loan to value ratios accepted by lenders.
Interest rates for reverse mortgages are generally higher than the average variable loan, though.
“The provider takes on a lot of unknown risks such as how long the mortgage will be operating and what property prices might do in this time,” Tindall said of the interest rates.
As customers don’t have to make regular repayments, it also costs more to provide a loan with deferred interest, experts say.
Tulloch sought legal advice to ensure she was educated as she went through the loan process and was now looking toward the changes she could make.
“The house is beautiful, and it’s liveable, but I want to be extra happy. I do want to get a new kitchen, I do want to do a few renovations in my garden,” she said.
Medina Cicak, chief commercial officer at Heartland Bank, said it had experienced a year-on-year increase in its reverse mortgages. The company reported 18.5 per cent growth in the current value of its reverse mortgage lending, or $309 million, to hit $1.98 billion as at June 30.
Tulloch has limited superannuation and got legal advice to ensure she was educated as she went through the loan process.Credit: Justin McManus
“Like we plan our super contributions and we plan our investments, we can really plan for our assets to be used in retirement,” Cicak said.
While reverse mortgages accrue compound interest, they don’t require regular repayments, and are repaid if the house is sold, the borrower dies or enters aged care, for example. People can apply for the loans from the age of 55 in some cases.
Household Capital said the average age of its new and existing borrowers was around 70.
“We have customers who start at 60 and go well past 100,” said its managing director Josh Funder.
More Australians are looking to tap the equity in their homes as they age.Credit: Leigh Henningham
The federal government offers an alternative to a reverse mortgage called the Home Equity Access Scheme. It allows age pensioners (67 years) and over to access the equity in their home through an Australian government loan, which can supplement their retirement income. Compound interest is charged on the loan, currently at 3.95 per cent per annum.
According to data from the HEAS, there were 3142 participants in the scheme at the end of June 2020, but this increased to just over 17,000 as of June this year. The total loan balance of the HEAS is $566.2 million.
Making home improvements is the most common reason Heartland’s customers are taking out reverse mortgages (about 50 per cent), according to the lender’s data for the calendar year to end-June. Debt consolidation and providing extra income make up the top three, while car replacement and holidays are followed by gifts and covering medical expenses.
Heartland said it was common for customers to use the loan for more than one purpose.
Anthony Landahl, managing director at mortgage broker Equilibria Finance, said his customers were interested in reverse mortgages to help ease cost-of-living pressures. They may also want to help their children with a home deposit or assist with their grandchildren’s education expenses.
Making home improvements is a key reason for people taking out a reverse mortgage, data shows.
“They might use the equity in their house to essentially give themselves an income stream or they are looking at doing renovations,” he said, adding that this can lengthen how long they stay in their house, “which might be more cost-effective or more desirable than moving into an aged care facility.”
Funder said the number one use for Household Capital’s household loans was to refinance their bank loan.
“That means they can stay in their home as long as they like, and they don’t have to make regular repayments, and they improve their retirement income,” he said.
Andre Karney, joint chief executive of provider Inviva, said reverse mortgages fill a gap for Baby Boomer homeowners who may not be able to get access to extra funding.
“People’s desires are generally to age in place. They’re very comfortable in their neighbourhoods,” he said.
Not all lenders offer new reverse mortgages.
Customers are shielded by the fact that reverse mortgages taken out after mid-September 2012 have negative equity protection, where lenders can never ask for more than what the house is worth. Mortgagees can also stay in their home as long as they want.
The Australian Securities and Investments Commission’s MoneySmart website says borrowers who took out a reverse mortgage before that date could check their contract to see if negative equity protection is included, and if not, talk to their lender or get independent advice on next steps.
Landahl said there were a number of “critical things” to consider when taking out a reverse mortgage, adding that it may be important to engage family members in the process.
“It plays a role, particularly for a lot of that generation where they might be asset-rich and not have a strong cash flow,” he said of reverse mortgages.
“It’s really, really important to understand the impact of a reverse mortgage on the asset that it’s being secured against.”
Tindall agreed, suggesting prospective borrowers get advice.
“If you’re looking for a workable solution to stay in your family home for longer, it’s worth exploring all the options and making an informed decision.”
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